Mr. Nawaz Sharif has kicked off with a bit of a bang. The measures that he announced in his first address to the nation are all commendable. Many are reiterations of good decisions taken by the caretaker government earlier, like quashing all sorts of VIP facilities and discretionary powers of public officials and slashing wasteful governmental expenditures. Others are praiseworthy, bold initiatives, like the rational decision to restore Sunday as a public holiday. The ban on lavish wedding receptions is also most welcome. Such occasions had begun to alienate the poor from the rich and deepen class contradictions.
Mr. Sharif has also made a stirring appeal to Pakistanis everywhere to bail their country out of the debt trap. Resident Pakistanis are reported to be ready to help the cause. And the government is optimistic that expatriates will respond in a similar manner.
A word of caution, however, may be in order. Three types of deposits are solicited — flat donations, no-interest deposits and interest bearing deposits. If much of the money which flows into Mr. Sharif’s debt-relief fund turns out to be a financial transfer from one domestic interest-bearing rupee or dollar bank account in the country to another such interest-bearing account in the name of the government, there will be little net gain to the forex reserves of the country. In the event, the scheme will fail to deliver any dividends.
The real task is to increase our forex reserves on the basis of interest-free deposits from Pakistanis abroad. If this Pakistani community responds passionately to Mr. Sharif’s plea, the government will get some breathing space in which to pay off its short-term debt and start addressing the macro-economic structural problems of the economy. If it doesn’t, Mr. Sharif will have to order belt-tightening all round.
Will Pakistanis abroad respond in a big way to Mian Nawaz Sharif’s urgings to help their country? Or will they adopt a wait-and-see attitude and respond only after a demonstrable effort by Mr. Sharif to fashion viable medium-term macro-economic policies which inspire long-term confidence?
It may also be argued that a reasonably satisfactory response is predicated upon a demonstration of political maturity on the part of the prime minister. Does his selection of cabinet colleagues inspire confidence in his ability to deliver? Will honest professionals be hired to man the Planning Commission, Privatisation Commission and various banks and development finance institutions? Does Mr Sharif have the foresight to retain good relations with President Farooq Leghari and General Jehangir Karamat? Do his actions promise good government and political stability? There is, finally, the question of good relations with donors like the IMF and World Bank which lend international credibility to Pakistan.
Mr Sharif is, of course, well within his rights to reject the IMF’s prescriptions, in particular its insistence upon reducing the fiscal deficit from 6% to 4% by next June. But when he abandons the IMF’s recipe for good health, he should be aware of the enormous risks attendant upon his course of action.
Mr Sharif’s strategy for economy recovery is based upon supply-side economics. He wants to give liberal tax breaks to the business community so that they are spurred to invest profits into export-led growth. He would like to pour public money into infrastructure projects so that employment opportunities are opened up and industrial productivity is enhanced. In order to carry out such expenditures, he needs to retain a fiscal deficit of at least 5% or more.
The IMF’s recipe is based on demand-supply economics. It wants to slash government expenditures, increase tax revenues and cut government borrowing. A lower fiscal deficit target is expected to rein in inflation, lower interest rates and encourage industry to pull up its socks and become internationally competitive.
Mr Sharif’s strategy, in theory at least, is as workable as the IMF’s. Its advantage is that it imposes less hardship on ordinary people than that of the IMF. But the disadvantage is that there is no fallback position in the event of failure. If Mr Sharif says good-bye to the IMF now, he cannot expect it to come to his rescue later. Economic failure will also result in a total loss of international credibility and foreign investment will stay away for a long time to come.
In the absence of extended support from the IMF, Mr Sharif needs a couple of billion dollars immediately in order to make debt payments and beef up reserves. If Pakistanis abroad balk at helping him out, he is doomed to default — the trade gap this year looms at about US$ 4 billion while reserves are down to only one months’ import bill. This could have devastating consequences.
Perhaps a second-best solution may be preferred. While Mr Sharif makes a dogged attempt to attract low or no-interest forex deposits, he should keep the IMF on board by broadly remaining within the parameters of its agenda. By June, when the budget is due, the picture should be clearer. If he has the money to shore up reserves, he could push ahead with his package of reforms. If he doesn’t, he must press ahead with the IMF package.